Supreme Court Rules in Favour of Landlords in Service Charge Case

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Landlords of a block of flats in Hampshire, are entitled to vary service charges levied on leaseholders, the Supreme Court ruled on 9 February 2023 in a clarification of the Landlord and Tenant Act 1985. The dismissal of the tenants’ appeal was the fourth ruling in a dispute which began when leaseholders objected to the reapportioning of the charges above those percentages set out in their leases.

The court upheld an argument by landlords Aviva Investors Ground Rent GP Ltd and Aviva Investors Ground Rent Holdco Ltd that the service charge provision in the leases were not limited to the specific percentages stated but can be varied if necessary.

The ruling gives the landlords more flexibility to adjust service charges than they were given in an earlier Court of Appeal ruling. The lower court judges had said that landlords should apply to the specialist property court the First-tier Tribunal (FTT) to make adjustments. Section 27A of the Landlord and Tenant Act 1985 gives the FTT jurisdiction to make decisions about service charges. However, the Supreme Court said today that this would be impractical and would overburden the FTT with requests and that instead of obliging landlords to refer to the tribunal, tenants should take legal action against increases they considered to be unfair.

The service charge contained in each of the relevant leases consisted of three elements; insurance costs, building services costs and estate costs, with the wording fixing percentages that the tenants would pay “or such part as the Landlord may otherwise reasonably determine”.  The landlord had been demanding service charges in different proportions from the leases for many years, relying on the phrase “or such part as the Landlord may otherwise reasonably determine.

The FTT had rejected the tenants’ argument that the discretionary wording was rendered void. It considered that the landlord’s re-apportionments were reasonable and so should be enforced. The Upper Tribunal held that the effect of section 27A(6) of the 1985 Act was that the entire discretionary wording was void and deleted from the lease. Next, the Court of Appeal interpreted the lease as if the FTT had discretion to determine the proportions in place of the landlord and restored the decision of the FTT.

In a unanimous decision, the Supreme Court dismissed the tenants’ appeal and approved the decision of the FTT. The FTT could still determine whether the landlord’s proportions were reasonable, so the FTT’s jurisdiction had not been removed and they noted that it would be uncommercial to set in stone the proportions on a lease that lasted 125 years.

This decision will provide clarity for landlords on the effect of this commonly used mechanism for revising service charge proportions.

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